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Homebuilder must-know: July 2014's starts, sales, and prices

Part 4
Homebuilder must-know: July 2014's starts, sales, and prices (Part 4 of 5)

Why home prices are within 13% of their August 2006 peak

The CoreLogic index of real estate prices increased 7.5% year-over-year in June

The CoreLogic index is a widely followed index of real estate values. Unlike the other major indices, like Case-Shiller or Radar Logic, CoreLogic separates distressed sales from non-distressed sales. Non-distressed sales more indicate the core market in general. Note that CoreLogic recently bought the Case-Shiller indices, so we’ll see if it changes its methodology.

CoreLogic Home Price Index 1 yearEnlarge Graph

Mortgage REITs, like NewCastle (NCT) and PennyMac (PMT), as well as homebuilders, like Lennar (LEN), Standard Pacific (SPF), and KB Home (KBH), pay close attention to real estate values.

The CoreLogic Home Price Index

Real estate values are big drivers of consumer confidence and spending. So they have an enormous effect on the economy. The phenomenon of “underwater” homeowners—those who owe more than their mortgage is worth—has been a major drag on economic growth. Underwater homeowners are reluctant to spend and can’t relocate to where jobs are. Real estate and mortgage professionals watch the real estate indices closely.

Real estate prices are also a big driver of credit availability in the economy. Mortgages and loans secured by real estate are major risk areas for banks. When real estate prices are falling, banks become conservative and reserve funds for losses. Conversely, increasing real estate prices make the collateral worth more than the loan, which encourages them to lend more.

Month-over-month growth is decelerating but still positive

The 7.5% year-over-year gain resembles the gains we saw during the bubble years. Month-over-month basis, the increase was only 1.0%—still pretty decent. Ex-distressed sales, prices rose 6.9%. Prices are still 12.9% below their April 2006 peak.

Note that the FHFA Home Price Index has prices within 6.5% of the peak.

The difference between the indices is the sample. The rebound has been strongest in the western states—primarily California, Nevada, and Arizona. That said, of the 100 distinct markets that CoreLogic measures, 98 showed year-over-year gains.

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